2: The Follow-Up column revisits an earlier recommendation of JPMorgan:

JPMorgan looks as good as it did six months ago at the time of our cover story. Under CEO Jamie Dimon, the bank has invested in key businesses and is a leader in investment banking, credit cards, and asset management. It is also looking to trim expenses.

At the current price, investors get a best-of-breed bank, with a management team that arguably is the industry’s best,”

This performance almost identically tracks Wells Fargo, which is the other “well managed” money center bank. Heck there are really only four now, and let’s accept as a given that Citi and Bank of America were less well managed.

But I can never get excited about these things. The Jaime Dimon-is-a-superb-manager seems to be one of the very non falsifiable managerial propositions. Maybe it’s not falsifiable because it is true. But a _great_ manager would have steered clear of the financial crisis. A better-than-others just avoids bankruptcy better than others. I’m not excited about this and feel when JPM is so regularly getting the drum beaten at Barron’s (which also had an article enamored of regional banks) my gut says pass.

* * *

Coverage of the Dell buyout of EMC was a bit lazy spread out through the magazine – recommending that one could make 19% on an arbitrage over the deal. Not if VMWare ($69) continues to dive, a possibility only lightly explored in that article but was visited elsewhere.

There was a decent piece on the tower operators for cell phone companies, focusing on AMT ($96), CCI ($81), SBAC ($110): perhaps beneficiaries instead of victims of Google Fi/Fiber rollout (not mentioned in the article) as well as the national emergency system. Central contention from Alexander Eule is AT&T can’t let quality degrade more so fears overblow.

I got an investor deck for a startup that was going to “disrupt” Autodesk. Pfft is my first thought. They have an enormous operational moat I replied and…then thought in the back of my head, why not look at Autodesk (NASDAQ: ADSK) itself. But it slipped my mind. Who thinks of Autodesk these days?

Then Alexander Eule of Barron’s wrote September 26th about Autodesk, which may as well be known as AutoCAD, after their dominant engineering design suite. They are undergoing a pricing change, shifting from boxed-perpetual to cloud-licensed product. Adobe is in the midst of completing their own pricing transition, to much applause from the street. The primary source for the article is Rob Nicoski of Disciplined Growth Investors who sees, if the transition is well executed, “a company with earnings power of more than $4 a share in five years.”

Beyond the fashion of cloud applications – though that’s a relevant consideration for investors looking to have multiples expand, the cloud subscriptions can also significantly reduce the piracy rate that afflicts so much high value software. In Autodesk’s case, that’s estimated at 43% (in this investor report, slide 20)

Autodesk like most tech companies has the problem of explaining GAAP to non-GAAP (meaning, huge employee option grants off the books) expenses but assuming market reception to his remains neutral, the product & cash roadmap is intriguing. From the investor presentation at 2015’s investor day in September:

These numbers bear a great deal of similarity to the analyst estimates’ provided for stories in Barron’s so the likelihood of them should be taken with a grain of salt. That said, engineering and design software is awfully sticky, and deeply embedded into business processes that it would be harder for a start up to disrupt.

Autodesk has under-performed, severely, similar design-oriented software firms like Adobe & Ansys: almost no return in the last ten years versus a 300%+ and 150%+ return.

Adobe’s break to new highs in December 2012 at around 36 presaged an enormous run to the low 80s today – though perhaps a bit ahead of itself now, with an unfavorably received earnings report tonight.

After a decade of lackluster performance there’s a lot of execution to prove. Waiting for a new high in ADSK might leave a lot on the table but that’s preferable to dead money for another ten years. With a market generally threatening a downtrend, there is no particular need to jump in now either. This is a classic case of wanting to follow quarterly reports to see when there is a good market response to successful strategy implementation. One is tempted to nibble at it now.

That said, if the product pricing strategy works, and the engineering software market widens or deepens, long dated call options are an interesting play. Open interest is high in the ADSK Jan 2017 60 and 65 calls, with a last ask of $2.11 & $1.39 respectively. Jan 2018 calls are more thinly traded, with a 70 strike at $2.60 ask, $2.20 last. Maybe not bad for the pivot potential in a stock that was at 63 not so long ago this year until cash flow fears materialized.

Amazon Reveals Just How Profitable the Cloud Can Be: by Tiernan Ray. Ultimate conclusion is that Microsoft’s Azure is doing well too. Which would you rather invest in, $MSFT (47) or $AMZN (445) a cloud provider in a hugely profitable if diminishing cash cow or one “trapped in a retailer.” Unresolved: is Azure a function of that dying business of companies running on Windows? Microsoft got other loving mentions in Barron’s as well from the usual spreadsheet watching crowd.

A Recharge for Qualcomm. Can Jana partners get $QCOM (68) to split off the licensing from the chip business? This is an article very related to the above MSFT & AMZN discussion so far as shareholders are concerned.

Let’s Take a Short Ride, a Heard on the Street Column from April 18-19 suggested the desirability of a strategy as follows:

bet against the 10% of stocks with the highest days-to-cover ratios, and bought the 10% with the lowest…it would have fared from the start of 1988 to the end of 2012. The results: a return of 2,917%–almost double the total return of the [DJIA].

Long anticipated Google Fi is here. Specifically uncovered in regulatory filings last fall, providing a (good) network was a natural extension for a firm whose growth comes from increased internet usage. It turns out to have been considered since at least 2007. On Fi you’re on a, you guessed it, Wi-Fi network first. If none is available you get Sprint and T-Mobile’s Network, whatever is working best at the time. No doubt Google’s wireless network to come to help replace, ahem, compliment them.

This comes on top of — and ultimately related to — Google Fiber. One report a year ago had Google Fiber winning 75% market share…and 30% of low income households where after all the service at 5 megs is free. Who cares if Time Warner and Comcast had merged or not?

Free – or less than free – is tough to beat, and the writing is on the wall. Verzion and AT&T have higher quality networks…for now. As Bill Gurley says in the link regarding the GPS market:

Despite these challenges, it would be a dangerous strategy for any of the many threatened players in these markets to hang on to this “quality” rationalization for very long.

It’s hard to see how the cable and telco stock prices haven’t tanked in anticipation of the forthcoming price war against Google that only Google (or Facebook, or Amazon, or Apple) can win.

* Successfully shorted ZN last few days, lowered the position size for unusual time period. Long March Wheat at 662.75, short Twitter at 41. The wheat has a nice risk-reward and I’ve put in a stop under the lows.

* Really liked Stanley Druckenmiller’s interview on Bloomberg including comments on what great managers are for, and that Japan’s Nov-May seasonal rise is one of the most reliable in the world (including 40k to 7k overall decline, you’d still have made money.) Suggestion of shorting IBM given cloud computing challenge and their use of capital is a compelling idea that deserves more investigation (the low p/e as is makes me wonder about risk-reward versus other short possibilities.) Declining free cash flow argument works even better against NFLX for example. The Amazon comments – that AWS could be half of revenue soon also merit further examination.

* Looking closely at NFLX, HLF, TSLA, P, LNKD on top of TWTR as shorts.

Back from Greece and looking to fire up the blog: ahead on short ZC position from 760; about to break through 735 which has been the repeated low of the last month:

Prior to the summer run up Corn was in the 550s. I have no idea if it can rapidly return there but feel this is a decently safe position to enter into an extension of the position. I did the same on the LULU short, less for technical reasons than increasing fundamental conviction at 68:

I’m down on the effective ZNGA long position (by shorting Jan 13 & 14 puts at 3 & 2.5; the premiums got most of the move down and I also feel there isn’t much further move down there but perhaps could have waited a bit longer to enter the position: now trading underneath net asset value makes the risk minimal I think.

China Airborne is a slight misnomer of a title — implying the usual indomitable success stories about China’s recent economic growth. These are plentiful: gushing portrayals of new airports from Tom Friedman, warnings from Niall Ferguson or even Tom Siebel (part of this itunes lecture, admittedly given in darker US economic days of 2009.)

Fallows’ mixed work — it is repetitive at times and meanders too much around personal experiences in ways to my taste others such as Robert Kaplan do better — takes a different approach. It wonders if Chinese economic progress may be capped by its controlled, state-centered approach. Fallows is an avid pilot. Is China capable of creating a high value industry such as the Airlines? The question is treated at all levels: production of planes, placement of airports, training of pilots, control (now largely military) of Chinese airspace?

While he concludes that someone who answers authoritatively the question either knows much less or much more than him, the strong hints are he believes not. The complexity of airplane development is one thread of the book, and sometimes comic state control from make work jobs to his own confrontations with police.

If you have four pages to read they are pages 92-96: “Apex Industries” and escaping the smiley curve. The smiley curve represents a U shape of profit margins. Brands and high value development are one, profitable edge of the “U” and high end retail and service are the other, where China is stuck at the bottom. The compelling data is that trade deficits mask a lot of this phenomena – the entire iphone is represented as part of a Chinese trade deficit as a finished product but at best less than a tenth of the profit goes to China for example.

An Apex industry is drawn from biology’s “apex predator”: the lion on the savanna whose presence depends on layers of prey below them on the food chain. If they’re there, the whole ecosystem is in good shape. Aviation is obviously one of those apexes, biotech might be a natural other one. Here the book tantalizingly ignores a more full investigation into the state of university systems (rampant cheating and poor if voluminous paper production in China has them nearly outside the global academic community.) It also discusses the state firewall and gives anecdotes of the war against Google. Had these been more fully explored the book might have made a greater impact than it did in publication this year.

The verdict on Boeing (BA $69) is unclear — though he provides a lens on the history of aviation one doesn’t find elsewhere, including early Chinese aviation pioneers in the Sun Yat-Sen era. Several analysts discuss the enormous mistake Boeing has made in the outsourcing of much of the value chain — but this also hints at strong value to be found in General Electric (GE $23) engines; GE spends $2 billion annually on engine R&D he claims compared to $300 million in all of China.

Berkshire Hathaway has issued shareholder letters every year since 1977. I was reminded by this of Joe Kraus’ investing tips which included the recommendation from David Siminoff to read all of Warren Buffett’s letters. In 1977 the holdings (which you could have gotten for $131, preparing for your 1,000x return over the next 25 years) were surprisingly for me concentrated in media companies both on the content side (Capital Cities, Knight Ridder, Washington Post) as well as the agency side (Ogilvy & Mather, Interpublic Group); 5 out of effectively 7 investments that were publicly held. Privately BRK owned the Buffalo Evening News as well. Knight Ridder appears to be flipped the following year, and Capital Cities exchanged for ABC (well before the 90s takeover, I’m not sure what happened there). Still as a window into the 20th century’s greatest investing mind it’s nice to see a strong window of support into media.

Barrons and Forbes both did big profiles on Intuit (INTU 58) this weekend. When this happens it’s not likely by accident and you can thank a good PR company. Rising stock prices affect the likelihood of feature articles. Reporters want to explain to their readers what is going on, and whether to get on the bandwagon. Sometimes they do themselves. Continue reading →

Besides our primary residence, we still own our old house in Pleasant Hill’s “Poet’s Corner” whose streets are named after poets like Byron and Shelley and other names most people who live there will vaguely remember from tenth grade English. This is presumably more respectable or better marketing than the names of the daughters of the real estate developers or some trees and flowers and other conventions, and is among the better neighborhoods of this suburban community. Most of Pleasant Hill was like the rest of the East Bay, developed after World War 2. Our neighborhood was built in 1947 on what appears to have been a former Mushroom farm, whose spores still disproportionately take hold in the spring. There are touches of character such as Molino’s Ravioli but dining like “Nibblers” Catalan menu sadly failed in competition with Roundtable Pizza or BBQ. This is family-raising territory, good California living subject to all the pros and cons that means.